Global Japan & the Problems with a Debt Jubilee

Bill Buckler critiques the notion of a debt jubilee:

The modern “debt jubilee” is characterised as “quantitative easing for the public”. It has been boiled down to a procedure where the central bank does not create new money by buying the sovereign debt of the government. Instead, it takes an arbitrary number, writes a check for that number, and deposits it in the bank account of every individual in the nation. Debtors must use the newly-created money to pay down or pay off debt. Those who are not in debt can use it as a free windfall to spend or “invest” as they see fit.

The major selling feature of this “method” is that it provides the only sure means out of what is called the global “deleveraging trap”. This is the trap which is said to have ensnared Japan more than two decades ago and which has now snapped shut on the whole world. And what is a “deleveraging trap”? It is simply the obligation assumed when one becomes a debtor. This is the necessity to repay the debt. There are only three ways in which a debt can be honestly repaid. It can be repaid with new wealth which the proceeds of the debt made it possible to create. It can be repaid by an excess of production over consumption on the part of the debtor. Or it can be repaid from already existing savings. If none of those methods are feasible, the debt cannot be repaid. It can be defaulted upon or the means of “payment” can be created out of thin air, but that does not “solve” the problem, it merely makes it worse.

The “deleveraging trap”, so called, is merely a rebellion against the fact that you can’t have your cake and eat it too. So is the genesis of the entire GFC. Debt can always be extinguished by means of an arbitrarily created means of payment. But calling that process QE or a Debt Jubilee doesn’t (or shouldn’t) mask its essence, which is simple and straightforward debt repudiation.

A “debt jubilee” is the latest attempt to make a silk purse out of a sow’s ear. It is the latest pretense that we CAN print our way to prosperity, but only if we do it in the “right” way.

Well, he’s right  — it is the latest attempt to make a silk purse out of a sow’s ear. But that’s the hand we’ve been dealt. I’ve always said I would have preferred it if markets had been allowed to clear in 2008, if prices had fallen of their own accord to a sustainable level, and if all the junk and bad debt had been liquidated. Painful — but then there would have been no deleveraging trap at all.  In a truly free market debts that can’t be repaid, aren’t.

Yet that’s not the world we have; we have a world where central bankers are prepared to engage in unlimited liquidity injections, quantitative easing, and twisting — pumping new money into the financial system to keep the debt serviceable.

It’s like central banks’ efforts to stabilise markets and the financial system put the wider economy into an induced coma following 2008 in order to prop up the financial sector and the huge and exotic variety of credit assets created in the boom years. With the debt load sustained by the efforts of central bankers, the wider economy is left in a deleveraging trap paying down debt that in a free market would have been repudiated long ago.

This process not only enriches the financial sector by propping up bad debt that would otherwise be liquidated, but also transfers purchasing power from the productive sectors to the financial sector via the Cantillon effect. Meanwhile unemployment remains elevated, industrial production remains subdued, the West remains fragile to trade and resource shocks, wages and salaries are at an all-time low, and total economic activity remains depressed.

So this is a painful and unsustainable juncture — truly a sow’s ear of a situation. The deleveraging trap is a catch-22; while debt remains excessive, economic activity remains subdued, and while economic activity remains subdued, generating more production than consumption to pay down debt is extremely difficult. As we have seen in Japan — where the total debt load remains above where it was 1991 — fundamentals can remain depressed for years or even generations.

Certainly, the modern debt jubilee isn’t going to cure the culture that led to the excessive debt. Certainly, it won’t wash away the vampiristic TBTF megabanks which caused the GFC and live today on bailouts and ZIRP. Certainly, it won’t fix our broken political or financial systems where whistleblowers like Assange are locked away and fraudsters like Corzine roam free to start hedge funds. And certainly it won’t wash away the huge mountain of derivatives or shadow intermediation that interconnect the economy in a way that amplifies small shocks into greater crises.

We are, I think, passing through a strange phase of history where a myriad of ill-designed and heavily-leveraged economic planning experiments are failing.

The modern debt jubilee would at least provide some temporary relief for the debt-ridden wider economy, instead of the financial sector. Instead of pumping money solely to the megabanks — and the costs of deleveraging such a huge debt bubble means that more easing is inevitable, eventually — pumping to the public would also negate the problem of transferring purchasing power to the banks via the Cantillon effect.

It’s not going to save us from the wider problems — imperial overstretch, bailout culture, deindustrialisation, job migration, financial and political corruption, etc, etc, etc — but it would still be much better than the status quo.

The biggest problem with the modern debt jubilee, though, is that Wall Street and the financial sector are greedy and will likely fiercely resist any such efforts. And the financial sector holds lots of political leverage.

The cost of the status quo is a perpetually depressed economy and global Japan. That will be painful.

But on a long enough timeline, the survival rate for everything — even reinflated debt bubbles — drops to zero. 

Could be a long wait, though.

30 thoughts on “Global Japan & the Problems with a Debt Jubilee

  1. Debt needs to get pushed from younger generations to older generations to make that timeline shorter. We should privatize the jubilee. “mom, dad… We won’t stick you in a nursing home if you use your good credit to cash out and pay off our mortgage.”
    Having a generation or two raised on moral relativism can get pretty grim.

  2. In order for a Jubilee not to be a handout to banks via us, the people, isn’t it desirable for the banks to have to write the debt off to an assets current value?

    If we accept that an asset is worth as much as a bank is prepared to lend you to purchase it, and know that banks have been predatory lenders, shouldn’t they have to bear some of the moral hazard?

  3. “The biggest problem with the modern debt jubilee, though, is that Wall Street and the financial sector are greedy and will likely fiercely resist any such efforts.”

    Let’s say the debt jubilee mandated that everybody in the United States had to subscribe to “Azizonomics,” would you have a problem with that, John?

    No? Well, why would the banks/Wall Street have a problem with people having to pay them?

    • If I forced everyone in the USA to pay me $1 to subscribe to my site for a year, I would be acting like an asshole.

      So yeah, I would have a problem with that.

      • The past decade’s consumption binge was brought forward from the future. It is all relative. People will have to pay own the debt or be a credit defaulter.

        BTW I pledge that if I make money from my predictions that I will donate to your site. If I lose, you provide good value for money reading whilst I recap my error!

  4. I think you are right that IF money is going to be created out of thin air to keep kicking the can down the road THEN it would be better if that money paid down private debt and went equally to those in society who have lived intelligently and prudently and have no debt, rather than enriching criminals and sociopaths via the Cantillon effect (and outright theft).

    But it certainly would be just another form of can-kicking. Just another symptom of short-termism. Just another embrace of the fantasy of living in a magic realm where one can spend and consume way beyond one’s means without a thought about the future consequences of such insipid behavior.

    In other words, just more bullshit, though perhaps in a lesser of evils kind of way.

    So I guess I disagree with your conclusion that the biggest problem with the modern debt jubilee is that TPTB won’t let it happen, though I agree that they won’t. The biggest problem is that it is not a solution to the real issue that we face and we need a solution, not another dose of symptom-alleviation that seems to let us off the hook of dealing with our collective fantasy-land bullshit once and for all.

    • There are a lot of different issues going on here. I don’t think there is such a thing as a hole-in-one solution that will solve everything. It’s possible that given the hand we’ve been dealt, some temporary relief may in fact be the best plausible outcome.

      • Yes, of course you are right that there is no magic solution just as there is no magic pill. I probably shouldn’t have used the phrase “once and for all.” But I do really believe that anything that doesn’t include a heaping dose of responsibility and accountability is just more of the same that caused the mess we are collectively in, which I might add, unlike a hand of cards that we were “dealt,” we collectively chose every step of the way (even if there are many of us who only went along for the ride kicking and screaming).

        • Well on one level the pain of the Great Depression set up America for sixty years of unabated prosperity. I think that we need to learn why Greenspan bubbles, bailouts, political corruption, imperialism, financialisation, and deindustrialisation are bad. On the other hand, we’re already in a lot of pain. Whatever happens, my generation — like kids that grew up in the Great Depression — are going to be one of those generations that is forced to learn a lot of tough lessons fast.

  5. Hey John,

    My latest post deals with the idea that interest rates are not at historic lows, they are actually triple digit. Compare the change in GDP to the change in national debt. In 2011, US GDP grew by $677B, as the government borrowed $1.198T, so each dollar of GDP growth created $2.08 in new debt. In effect, that’s an interest rate of 108%.

    Hope you’ll find time to read it: It’s the result of several discussions we’ve had.

    • Cool article and very interesting idea, tying the ROI on new government debt to an underlying “interest” rate. I’d like to see some more substantiation. I think you need to prove that it is a symptom of something more than just underlying weak fundamentals that is causing the problem of low ROI. A mainstream economist might say that new debt is not just generating low growth; that’s just the tip of the iceberg because the new debt is actually offsetting economic shrinkage.

      Also Ben Bernanke has a really awesome beard.

      • 2002-2011, 9.3 Trillion in National Debt has produced 4.8 Trillion in GDP growth, making the effective interest rate (based on repaying principal only) 94%.

        That’s adding up changes in debt by year vs changes in GDP by year.

        And it’s not “government debt” to me. It’s my debt and my kids debt. Every “new” dollar in GDP will cost us $2. The primary reason VoM is plummeting is tax policy. When you bazooka cash into the economy, you need to take a “use it or lose it” approach. If you allow people to stuff their mattresses with the easy money, that’s just what they’ll do.

        People don’t like that concept. They say, “People have the right to do whatever they want with their money!!!” I’d agree if it were their money. But since I’m the one who’s responsible for repaying the debt, it’s my money.

        This is a wealth redistrubtion scheme. It’s trickle-up economics.

        • I agree. Growth should come from productive yielding crops, innovative ideas, manufactures that provide and increase in efficiency.

          The increase in government debt has has resulted in the increase in the G component of GDP.

          When people associate Government workers (Including Politicians) with expensive welfare recipients (Job for life, great pay, cushy conditions) then we will be better off. The crony capitalism of Government contracts is another area that has to be tightened up. Business day virtually exists to live off Government contracts (Weapons, Cars, Roads etc)

          Make sole traders tax exempt up to 1 million and watch how many innovative businesses spring up. As it is not a Company, they are legally responsible for poor quality. Partnerships can firm if capital is an issue. Joint and Several Liability will ensure quality without ridiculous toothless tiger regulation.

          The USA will attract the best and brightest from all over the world. It will produce the goods of the future and export again. If the USA does not do it a country may spring up with these principles and take the best and brightest from the USA. As the population of the world is centering South East Asia, perhaps an Asian country may adopt the Libertarian principles that will be the springboard for the future world we live in.

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  7. think you already know this, Aziz, but TPTB don’t want solutions, they want problems to fix (and by fix, I mean enrich themselves). This broken system pays off huge to a select few.

    That said, I completely agree that a debt jubilee is far better any currently proposed plan.

  8. Hey John, I’m new to the blog and I love it by the way.

    As for the whole too big to fail thing, I think it’s always been an issue throughout the world for a while. I’m reading Crisis Economics by Nouriel Roubini and I finished reading Manias, Panics, and Crashes by Charles Kindleberger and it seems to me that this issue of moral hazard and all of the other issues of financial institutions has existed for centuries.

    I think the major things that we need to change is that the banking system is a utility and we have to treat it as such. We also need to change the culture of excessive debt and leverage. The banking sector has become so large that it’s only purpose is to give itself bonuses and it ends up creating debt that we don’t need. I think we need to find a way to basically make the level of indebtness in society from becoming excessive. If it does become excessive, the economy needs to be sent into recession until we’ve pulled out all of the excessive debt–and it needs to be done so as quickly as possible.

    • Hi Kaysuv, and thanks for your thoughts. I spoke to a friend who has no idea about business or economics. A regular Joe who loves beer and sport. I asked if you have the choice between:

      1. Free money to pay off/down your loan
      2. Money to spend from your taxes that is a refund of tax from your earnings and you cab choose to buy goods or pay down your loan.

      He chose give me the free money! I will vote anyone in who does that!

      Debt Jubilee = Moral Hazard!

  9. “It is a rare case when faced with an immediate crisis that a leader will step back and assess the long-term implications of the short-term solutions which will avert or delay the crisis at hand. The present-day economic situation around the world is a result of no one ever worrying about a future financial crisis, because it was never a good time to bite the bullet and accept the consequences of our mistakes and failures. The solution for the last thirty years has been to kick the can down the road. This is how you end up with $100 trillion of unfunded liabilities, with the bill being passed on to future unborn generations. […]

    Kindleberger’s fears regarding the moral hazard of rescuing those who have taken excessive risk have been fully realized ten times over. The maestro – Alan Greenspan – should have his picture next to the term moral hazard in the dictionary. His entire reign as savior of American crony capitalism was marked by his intervention in markets to protect his bosses on Wall Street. His solution to every crisis was to lower interest rates and print mo money: 1987 Crash, Savings & Loan crisis, Gulf war, Mexican crisis, Asian crisis, LTCM, Y2K, bursting of internet bubble, 9/11. The Greenspan Put guaranteed the Federal Reserve would always come to the rescue with unlimited liquidity to prop up stock prices. Investors increasingly believed that in a crisis or downturn, the Fed would step in and inject liquidity until the problem got better. Invariably, the Fed did so each time, and the perception became firmly embedded in asset pricing in the form of higher valuations, narrower credit spreads, and excess risk taking. The privatizing of profits and socialization of losses continued and accelerated under Bernanke. These helicopter twins talked a good game, but their game plan only had one play – print money. Those Ivy League educations have proven to be invaluable.”

    Aziz, you say: “But that’s the hand we’ve been dealt.” You roll over too easily. More short-term thinking that inevitably ends up with more pain.

    • It would be nice if the Fed appreciated that their “stabilisation” mechanisms have produced a zombie economy. And when you look at the evidence, it’s hard to deny it — without the intervention, all these zombie banks and zombie debt would have been cleared long ago.

      But going forward I think it’s hard to assess what the short term effects of various policies will be, let alone long term effects. And in the long term, we’re all dead anyway.

      To some degree, I think we need to accept that this situation will work itself out naturally. This may take some time, and things may get rough. So it is likely that certain kinds of short-term relief (e.g. debt relief — remember all the Greenspan bubbles were debt additive) would be a relatively good outcome. Think of it like lubrication. Except the banks want all the lubricant for their bizarre S&M pastimes.

    • Precisely!

      Just look at interest rates dropping from the 80’s. This equates to the the same growth in Debt and “Bubble expansion”.

      Interest rates are not correctly priced, and savers have not been compensated.

      The more I read about this situation the more I am convinced we are governed by thieves, crooks and crony capitalists.

      I was jusat a humble boy from a working class family in a working class suburb of Melbourne Australia. I studied business and economics because I thought the rich people studied this and it was a recipe to get me out of my socio economic black hole. I assumed the rich were the good people who went to church and went to good schools and did “community projects” and made decisions that best served all levels of society.

      Now I realise we are governed by sociopaths who only care about their own power and short term political survival. The system has to change.

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  12. People want their cake and eat it too. If you want to have debt, then you are going to have these cycles [which ALWAYS end badly].

    A debt jubilee only makes sense if you eliminate debt on the other side. I am for that 100%. If you are going to continue with the same debt non-sense after the jubilee, then you are simply [and essentially] bailing out the creditors.

    Although painful, there is a GREAT lesson to be learned from this debt orgy. But, in order for the learning to take place, people must go through the painful process of bankruptcy.

    Not only will this cause people to be more responsible, but its lessons will be taught to successive generations [until once again people forget the great lessons of history and these bankers re-emerge from the bowels of the Earth with their bag of tricks].

  13. Aziz, you should look at McKinsey’s deleveraging report of 2010. UK’s last deleveraging was 1947 – 1980 of -167%. 33 years. We cant wait that long this time. QE for the People is a no-brainer.

    Surely the low hanging fruit here is QE to fund an income tax holiday, say for 18 months. There’s more taxes you can target relatively safely. Then let’s look at other stimulus measures that can be applied relatively fairly?

    • Yeah a tax holiday for people who actually bust their gut making a living, not from dividends or capital but by hard sweated physical labour. Progressive taxation is a kick in the teeth for the very same people that it is supposed to help! Someone like my father who is 62 but works 40 plus hours a week keeping up with a chain in an abattoir. If he does overtime he pays higher tax. Hence their is no incentive to do overtime, unless his employer pays penalties. I don’t know how he does it at his age!

      Maybe, if we follow the logic of our current politicians we just do what they have done to other industries in Australia, sell the cattle/sheep OS, and get them butchered in China and flown back to Australia.

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